EDITORIAL: Telstra has lost its way

by Peter Westmore

News Weekly, March 27, 2004

The Federal Government's recently-introduced legislation to sell the government's 51% stake in Telstra could hardly have come at a worse time. The monopoly telco had just been widely criticised for its $636 million deal to purchase the Trading Post Group.

It had been called before the Australian Competition and Consumer Commission (ACCC) to explain its anti-competitive retail broadband pricing, after it slashed the price of access to its broadband network to consumers, while maintaining the high wholesale prices to other Internet companies. A Senate Inquiry was told that small Internet providers could become insolvent because of Telstra's decision.

Additionally, internal Telstra documents, leaked to the ALP, showed that phone faults had risen to a six-year high, despite claims by the Government that Telstra's services in both urban and regional areas were up to scratch.

Deteriorating network

The documents, dated December 2003, blamed the rise in faults on general network deterioration because of a lack of rehabilitation work, and suggested that the situation would get worse unless more money was made available to network maintenance.

This occurred at the same time that the Chairman and Chief Executive of Telstra were considering spending billions of dollars to acquire the media group, John Fairfax Ltd, owner of the Melbourne Age, the Sydney Morning Herald, and other newspapers. The plan was eventually rejected by the Telstra Board.

Not surprisingly, a recent TV survey indicated that a massive 80 per cent of Australians were opposed to the full privatisation of the corporation.

This followed huge losses after the telco's part-privatisation in the 1990s, with its foray into the Australian pay TV industry, and its unsuccessful venture into the China telecommunications market with Pacific Century CyberWorks.

Concerns in the business community about Telstra are reflected in the fact that its share price is languishing around $4.80 per share, despite its high profits.

Not only shareholders, but all Australians who pay into Telstra's coffers are entitled to ask: what is wrong with this company? Is it just bad management, or do the problems go deeper?

Not surprisingly, the latest controversies have prompted new calls to separate Telstra's infrastructure network, much of which is a natural monopoly, from its retail services, such as the supply of telephones, installation and servicing, and now publishing.

This is not a new idea. In 2002, Stephen King, a University of Melbourne economics professor, suggested that it might be more desirable to split Telstra with shareholders owning the potentially competitive assets, while the basic infrastructure remains in government hands.

Writing in Privatisation: A Review of the Australian Experience, published by the Committee for Economic Development of Australia, he argued that full scale privatisation as planned by the Federal Government would replace a government owned natural monopoly with a privately owned natural monopoly.

"The partial privatisation of Telstra failed to adequately recognise the source of market failure - the natural monopoly customer access network. Neither did it establish appropriate procedures to deal with this problem," Professor King said.

If Telstra is fully privatised, it is inevitable that its focus on producing larger profits for shareholders will be at the expense of service delivery, particularly in rural and remote areas where the provision of costly telecommunications services can only be justified on national interest, rather than economic grounds.

It is vital, for the development of Australia, that people living in remote areas have access to the same communications services as those available to those in urban areas. Unless this happens for a range of services - including health, education, employment and communications - the drift to the cities will continue.

Unique

Whatever might be the experience of other countries, in Australia only a public utility can provide this infrastructure: it will not be a priority of privately-run corporations which must produce profits for their shareholders.

Telstra's monopoly services - the infrastructure of cables, microwave, and satellite links - should remain as a public utility, whose function is to provide improved services for people throughout the nation.

Unlike the partly-privatised Telstra, the operations of a publicly-owned telecommunications utility would be fully transparent, so that all telecommunications retailers would be treated equally, and it would be required, where necessary, to cross-subsidise services to people living in remote areas, or to invest in new technology - even if, at the moment, it is unprofitable.

The recurring statements by Government apologists in support of Telstra's privatisation need to be challenged by an alternative policy, based on a practical separation of Telstra into wholesale and retail units, with the monopoly wholesale services being a public utility. Such a policy, based on the common good, would meet the needs of all Australians.